Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether or not subsection 181.5(5) must be applied first before subsection 181.5(2)
Position: Yes
Reasons:
Subsection 181.5(5) is a very specific provision which must be taken into account when applying subsection 181.5(2 ) which is a general provision
June 21, 2002
HEADQUARTERS HEADQUARTERS
Business Returns Payments and Financial Industries
Processing Directorate Division
T2 Assessing, Business Returns Michèle Trotier
Assessing & Validation Division 957-3494
Attn: Hugh Finlayson 2002-014478
Legislation & Policy GroupSubsection 181.5(5) of the Income Tax Act ("Act")
This is in reply to your e-mail of June 3, 2002 wherein you requested our views on the application of subsection 181.5(5) of the Act.
Our understanding of the facts is as follows:
1. Co A and Co B are associated. Co A and Co B each had a June 30 year end.
2. Co C acquired control of Co A and Co B on July 1st, 2001. The deemed year end pursuant to subsection 249(4) of the Act of Co A and Co B is their June 30 year end.
3. Co C has a December 31 year end. Following their acquisition by Co C, Co A and Co B changed their year end to coincide with Co C's year end, December 31st.
4. Co A and Co B had two taxation years in the 2001 calendar year, June 30th and December 31st, 2001. Co C only had one taxation year in the 2001 calendar year, December 31st, 2001.
5. Co A and Co B were each allocated $5 million of the $10 million capital deduction for their June 30th year end.
6. Co C has allocated for the December 31st, 2001 taxation year a nil capital deduction to Co A; a $5 million capital deduction to Co B; and a $5 million capital deduction to itself.
You are questioning the allocation made by the taxpayer as described in paragraph 6 above and would like to have our views on what would be the amount of the $10 million capital deduction which is to be allocated to Co A, Co B and Co C for their December 31st, 2001 taxation years taking into account the provisions in subsections 181.5(1) through (5) of the Act.
We are of the view, XXXXXXXXXX, that subsection 181.5(5) of the Act is a very specific rule which overrides the more general rule found in subsection 181.5(2) of the Act.
Pursuant to subsection 181.5(4) of the Act the $5 million each allocated to Co A and Co B would be the least amount allocated to Co A and Co B for their June 30th year end and therefore would be the capital deduction of Co A and Co B for that taxation year.
In the situation described above Co A had two taxation years in 2001 and was related to Co B for both its June 30th and December 31, 2001 taxation years. Therefore, pursuant to subsection 181.5(5) of the Act, the capital deduction of Co A for its December 31, 2001 taxation year is an amount equal to its capital deduction for its June 30th year end which is as indicated above $5 million. The same would apply for Co B such that its capital deduction for its December 31, 2001 taxation year would also be equal to $5 million. Consequently, there would be no amount of the $10 million capital deduction that could be allocated to Co C for its December 31, 2001 taxation year. Pursuant to subsection 181.5(2) of the Act the $10 million capital deduction is to be allocated among the members of the related group, which in this case with respect to the December 31, 2001 taxation years of Co A, Co B and Co C would result in an allocation of $5 million to each of Co A and Co B and nil to Co C because of the application of subsection 181.5(5) of the Act.
We trust that the above comments will be of assistance.
F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Branch
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